Building the bridge to a secure retirement

OPINION | Australia is one step closer to ensuring all retirees have access to a better standard of living in their later years.

The government’s consultation on Comprehensive Income Products for Retirement (CIPRs) draws to a close on June, 9, 2017. Across the superannuation industry, there has been widespread interest in the consultation, which will lead to substantial change in a system that for the past quarter-century has been focused on accumulating assets, rather than generating sustainable income in retirement.

We are now at a stage where $60 billion in assets moves out of accumulation accounts into the retirement phase of super each year. Yet, as a 2016 National Seniors Australia survey showed, only 45 per cent of people aged over 50 are confident their savings will last their lifetimes.

Australia’s super system is essentially incomplete. Like a half-built bridge, it doesn’t take older Australians safely across to where they need to be – a more secure, more sustainable retirement.

The government’s CIPR proposal, which sensibly suggests rebadging CIPRs as the more user-friendly MyRetirement, sets out to build the rest of the bridge.

The consultation paper addressed four key issues:

Retirees are self-insuring against longevity risk, often living less comfortably than their savings should allow, because of the fear of running out of money.

There’s a lack of diversity and choice among products that efficiently manage longevity risk (the risk of outliving savings).

The superannuation system is inefficient in meeting its objective of providing retirement income, due to its over-reliance on account-based pensions, which account for 94 per cent of post-retirement super.

Retirees, including those who don’t seek financial advice, face complexity and behavioural biases in making financial decisions.

MyRetirement proposal would unite many elements

The proposed solution is to combine existing account-based pensions with pooled longevity products to provide retirees with income for life, better protection from economic risks and some capital flexibility.

Combining these products will provide an uplift in the standard of living of retired Australians.

While a number of elements will make up MyRetirement accounts, for the superannuation member, it will seem like a single product.

The essential insight of the proposed framework is that product design decisions are not binary. It’s not a case of growth investments or income investments. No single product can solve all financial needs in retirement; retirees benefit from a combination of products that work together.

A wider range of retirement income products such as deferred annuities will be available from July this year, following legislative changes. These will be important building blocks for MyRetirement offerings, along with existing annuities.

MyRetirement is envisaged as a mass-customised retirement product, with specific minimum features, for the majority of super fund members who do not seek financial advice. It would include a safe harbour protection for super fund trustees who satisfy the product regulation process.

Trustees will need to provide: a level of income that exceeds account-based pension drawdown at the minimum rates; a stream of broadly constant income for life to manage longevity risk; and a component to provide flexibility to access capital lump sums. The higher level of income the proposal contemplates involves a higher consumption of capital, which is then supported by longevity risk pooling.

A key element of the proposed framework is choice. Fund members will have the option to use a MyRetirement product, remain with an allocated pension or choose a lump sum.

An increasing number of retail and industry funds are already responding to customer demand for retirement income streams by recommending products that combine growth assets and annuities to deliver sustainable income that meets spending needs.

In this sense, the superannuation industry is starting to move ahead of regulatory change; these products are being offered across the full range of industry and retail platforms and distribution channels. For this reason, there’s a need to ensure that MyRetirement arrangements reflect this so retirees can access similar products easily.

The MyRetirement process still has some way to run; the new framework is not expected to commence until mid-2018 at the earliest, but the industry trend towards retirement income seems set to accelerate.

Richard Howes is a divisional chief executive of Challenger Limited, with responsibility for distribution, product and marketing.

New ACTU president Michele O’Neil says we cannot afford another generation that retires with inadequate superannuation simply to help Scott Morrison play anther pea and thimble trick with the commonwealth Budget.

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